This seems to have been lost against the export-rise noise: May CPI and PPI figures came out recently (3.1%, 7.1% respectively) making an interest rate hike by the central bank appear inevitable, probably in late June or early July. This will affect anyone who’s purchased a flat using a mortgage – given property bubble concerns – how this plays out could be interesting. It’s my understanding that local governments are also exposed to interest rate hikes in the form of various types of investment vehicles meant to supplement expenditures (from FT Alphaville):

LGFVs are conduits, like the Special Investment Vehicles (SIVs) were for western banks, used by local government to borrow and spend on infrastructure and other projects (like real estate).

Local Chinese governments share relatively meagre incomes from the country’s central tax pot, yet they’re charged with some pretty huge infrastructure and stimulus projects. What’s more they’re unable to run deficits, or get bank loans, or issue bonds without special central authority permission.

Enter the LGFV. Using these conduits, local governments are able to finance their projects in a rather roundabout way, borrowing money from banks in exchange for some collateral –often local land.

The scale of local borrowing is unclear; some put it as high as 150-160% of GDP (combined with national debt) which puts China comfortably in developed world debt ranges.